Can You Sell Your Life Insurance Policy for Cash?

Selling a life insurance policy for cash, known as a life settlement, offers an alternative to letting a policy lapse or surrendering it for its cash value. A life settlement involves selling an existing life insurance policy to a third party for a cash payment that is less than the full death benefit but typically more than its cash surrender value. When the policyholder is terminally or chronically ill, this transaction is specifically termed a viatical settlement. Both options allow policy owners to access immediate funds from an asset they might no longer need or can no longer afford.

Understanding Policy Eligibility and Valuation

Many types of life insurance policies can be sold in a settlement, including whole life, universal life, and even convertible term policies. The eligibility of a policy for sale, and the potential cash offer, largely depend on specific policy features and the health status of the insured individual. Typically, policies with a death benefit of at least $100,000 are more likely to qualify for a life settlement.

The most significant factors influencing the valuation of a life insurance policy in a settlement are the insured’s age and current health. Buyers assess the insured’s life expectancy, as this directly impacts how long they will need to pay premiums before receiving the death benefit. Generally, older policyholders or those with declining health conditions that shorten life expectancy tend to receive higher offers. The policy’s death benefit amount is another key determinant, with larger death benefits often correlating with more substantial settlement offers.

The ongoing premium costs for the policy also play a role in its valuation. A policy with lower future premium obligations is more attractive to buyers, as it reduces their holding costs. The policy’s existing cash surrender value is considered, as the settlement offer will generally exceed this amount. Buyers analyze these elements to determine a policy’s attractiveness and potential payout.

Steps to Selling Your Policy

The process of selling a life insurance policy begins with identifying and contacting licensed life settlement providers or brokers. A broker represents the seller and can shop the policy to multiple providers to secure competitive offers, while a provider directly purchases the policy. It is prudent to research the licensing status of any company or broker.

Once a prospective buyer or broker is engaged, the policyholder will need to submit necessary documentation for evaluation. This typically includes the original life insurance policy documents, which provide details on the face value, premium structure, and policy type. Additionally, medical records of the insured are required to allow buyers to assess health status and estimate life expectancy. The policyholder will also need to provide authorization forms, such as a HIPAA authorization, to permit the release of these medical records.

After the documentation is submitted, the provider or broker will initiate an underwriting process to evaluate the policy and the insured’s health. This assessment helps determine the policy’s value and generates offers from potential buyers. Policyholders will then receive and evaluate these offers, which are typically presented as a lump sum cash payment. If an offer is accepted, the final steps involve signing a purchase agreement, transferring ownership of the policy to the buyer, and changing the beneficiary designation. An escrow agent holds funds until the transfer of ownership is confirmed by the insurance company, then disburses payment to the seller.

Taxation of Policy Sales

The proceeds from selling a life insurance policy, whether through a life settlement or a viatical settlement, have specific federal income tax implications. Generally, the amount received is taxable to the extent it exceeds the policyholder’s cost basis. The cost basis is primarily the cumulative amount of premiums paid into the policy. Proceeds up to this cost basis are generally received tax-free.

Any portion of the settlement proceeds that exceeds the cost basis but is less than or equal to the policy’s cash surrender value is typically taxed as ordinary income. Proceeds received above both the cost basis and the cash surrender value are usually taxed as long-term capital gains.

Viatical settlements, which involve terminally or chronically ill individuals, often receive different tax treatment under federal law. Under the Health Insurance Portability and Accountability Act (HIPAA) of 1996, proceeds from a viatical settlement are generally tax-exempt if the insured is certified by a physician as terminally ill with a life expectancy of 24 months or less. For chronically ill individuals, the proceeds can also be tax-free if used to cover qualified long-term care expenses. Due to the complexity and individualized nature of tax laws, consulting a qualified tax advisor is highly recommended to understand the specific tax consequences of selling a policy.